SEC contacts Hollywood studios over China dealings

It's unclear what concerns regulators, but the letters relate to dealings with China Film Group by studios including Disney and DreamWorks Animation.

The Securities and Exchange Commission has sent letters to at least four major Hollywood studios, including Walt Disney Studios and DreamWorks Animation, over dealings in China, a person familiar with the matter but not authorized to speak publicly confirmed Tuesday.

The letters center on the studios' dealings with China Film Group, a state-run company whose responsibilities include determining which foreign movies get access to a limited number of slots each year for revenue-sharing deals in the red-hot Chinese movie market, which is now the second-largest in the world behind the United States.

The SEC letters are confidential, meaning the studios are not supposed to discuss them publicly or disclose their existence to investors, another person with knowledge of the letters said. Both the SEC and the Motion Picture Assn. of America declined to comment.

China has until recently permitted the import of only 20 foreign movies a year, most from Hollywood, under terms that allowed the studios to collect up to 17.5% of the box-office revenue. In February, China agreed to start letting in an additional 14 foreign movies every year, and increase the box-office revenue share to a maximum of 25%.

Foreign films that don't land one of the quota spots either receive a small fee to play in China — typically less than $1 million — or aren't seen in the country at all. As a result, getting into China under the quota system can mean tens of millions of dollars in revenue.

The SEC letters may be related to the Foreign Corrupt Practices Act, which makes it a violation of U.S. law to make improper payments to foreign officials for business purposes. The letters' existence was first reported by Reuters.

Despite widespread piracy, China last year generated more than $2 billion in box-office revenue. Among the top-performing movies there in recent years were "Avatar," which grossed $207 million, and "Transformers: Dark of the Moon," which generated $159 million. This year, the current-release "Titanic in 3D" has already taken in $105 million.

The number of Chinese screens doubled in five years to 10,700 at the end of last year, and is expected to rise to 13,000 by the end of 2012, according to the MPAA.

China Film Group's chairman, Han Sanping, recently visited Los Angeles and met with a number of Hollywood executives, including top officials at Universal and Sony. Han was accompanied in some of the meetings by Dan Mintz, chief executive of Beijing-based DMG Entertainment, a Chinese American media company involved in film co-production and distribution in China.

A spokeswoman for DreamWorks Animation declined to comment on the SEC letter. The Glendale studio has had great success in China with movies like "Kung Fu Panda 2," which grossed more than $100 million in the country. In February it unveiled plans to build an animation studio in Shanghai under a joint venture with two state-owned firms.

A spokeswoman for Disney did not respond to a request for comment. The Burbank entertainment giant recently signed a deal with a Chinese firm to co-finance the superhero sequel "Iron Man 3" and film part of the movie in the communist country. Disney is building a $4.4-billion theme park in Shanghai and has a smaller one already open in Hong Kong.

Spokespeople for other studios, including Warner Bros., Universal Pictures, 20th Century Fox and Sony Pictures, declined to comment.